Mexico, less GDP deterioration towards the end of 2009

Mexicos GDP continued to contract in Q3 of 2009 by 6.2% albeit less than in the previous quarters (Q1: -7.9%, Q2: -10.1%). As a result of the recession, unemployment rose further in October 2009 - to 7% - (6.2% in August 2008): the highest in 13 years, but still low in relation to the high proportion of informal activity. The consumer confidence index continued to fall in November - to 78.2: its second lowest level in 2009.

Remittances (the funds that expatriate workers send back to Mexico and which feed into the economy) are expected to decrease 14% in 2009, compared to an annual average growth of 16% over the last 10 years. Bank consumer credit shrank 20% in November 2009 after an average 35% annual growth since 2001. Both of these factors have taken considerable liquidity out of the economy.

All this has an immediate impact on companies payment behaviour, reflected in the steady increase in the Expected Default Frequency (EDF) since September 2008, to levels not seen since 2005. This indicator peaked at the end of Q1 of 2009 and subsequently showed a slight improvement, but increased again in October and November 2009.

In the construction sector, declining employment, increased interest rates and the tightening of credit availability resulted in a 42% decrease in housing demand. The credit crisis is severely diminishing the ability of third parties to raise long-term capital to finance infrastructure projects.

In the electronics sector, the total volume of production requests recovered by the end of 2009, but the level is still slightly below the numbers registered in July 2008. Consumer confidence remains low and the industry still shies away from important capital expenditure.

The automotive sector has not yet fully recovered, despite recent improvements in production. It still depends heavily on the US market, and domestic demand remains limited. The aftermarket subsector at least will continue to be stable. Imported tyres will no longer attract import tax: a positive sign for tyre traders but bad news for the domestic tyre manufacturing industry.

In the textile sector, the claims experience has been negative, in view of the still low US and domestic demand and fierce competition from Asia - both legal and illegal (over 56% of the market in garments is illegal). However, the footwear industry has recently reported some encouraging export figures.

Modest recovery and less volatile exchange rate in 2010

GDP growth is forecast to rebound to about 3% this year. Mexico began 2010 with a series of tax hikes on income, consumer goods, and phone service, along with a rise in fuel prices to ease a budget deficit sparked by last year's financial crisis and reduced oil production. As a result, inflation is forecast to rise to 4.8% in 2010 (from 4.1% in 2009). The peso-US$ exchange rate shows less volatility than in previous periods.